Aptiv PLC (APTV) — Q1 2024 Earnings Call Transcript

Thank you, Jess. Good morning, and thank you for joining Aptiv's First Quarter 2024 Earnings Conference Call. The press release and related tables, along with the slide presentation, can be found on the Investor Relations portion of our website at aptiv.com. Today's review of our financials excludes amortization, restructuring, and other special items and will address the continuing operations of Aptiv. The reconciliations between GAAP and non-GAAP measures for our first quarter results, as well as our 2024 outlook, are included at the back of the slide presentation and the earnings press release. During today's call, we will be providing certain forward-looking information that reflects Aptiv's current view of future financial performance and may be materially different for reasons that we cite in our Form 10-K and other SEC filings. Joining us today will be Kevin Clark, Aptiv's Chairman and CEO; and Joe Massaro, Vice Chairman of Business Operations and Chief Financial Officer. Kevin will provide a strategic update on the business, and Joe will cover the financial results in more detail before we open the call to Q&A. And with that, I'd like to turn the call over to Kevin Clark.

Thank you, Jane, and thanks, everyone, for joining us this morning. Let's begin on Slide 3. Operationally, we had a strong start to the year, demonstrating our ability to execute despite some headwinds. Touching on a few highlights. New business bookings reached almost $13 billion, reflecting the continued demand for our industry-leading product portfolio. First quarter revenue was just under $5 billion, representing adjusted year-over-year growth of 2%, impacted by continued slowing of electric vehicle production in North America and Europe production, and increased labor inflation. Earnings per share increased 27% to $1.16. Lastly, we repurchased $600 million of stock during the quarter, bringing the total amount of shares repurchased to $900 million over the last two quarters. In summary, the team did an exceptional job delivering solutions to our customers while at the same time, increasing operating efficiencies and reducing our cost structure. Turning to Slide 4. While we are encouraged by our strong first quarter execution, we believe that it's prudent to update our 2024 outlook to reflect the continued weakness in electric vehicle production, including significant customer schedule reductions over the past few weeks and the current negative impact of foreign exchange rates. As a result, we're lowering our full year 2024 revenue guidance by $450 million, principally reflecting a reduction in our outlook for high-voltage revenue growth. While we continue to believe that all regions are on the path to full electrification, some will move faster than others, so we consider it prudent to reduce our near-term revenue expectations. As the industry navigates the current headwinds, we're maintaining our high standard of flawless execution while continuing to reduce our cost structure and strengthen our sustainable business model. We're supporting our customers on a record number of new program launches, almost 2,300 in 2024, including over 750 program launches in the first quarter, the cadence of which gives us confidence in the acceleration of our second half revenue growth. We've also proactively executed initiatives that have lowered our cost structure. In early '23, we launched several initiatives to improve engineering efficiency in both our ASUX and SPS segments. And in late 2023, we executed additional cost actions across all overhead and operating functions, targeting more than a 10% reduction in salary payroll. In response to the recent softness of electric vehicle production schedules, we kicked off incremental cost actions that will generate an additional $50 million of cost savings through the balance of this year. The net result of these puts and takes is a $50 million reduction in our full year outlook for operating income to $2.5 billion, above the bottom end of our prior guidance range, representing an 11.8% operating margin and just under 80% growth in operating income. I'm pleased to announce that we've reached a formal agreement with the Hyundai Motor Group regarding our Motional joint venture, which positions Motional for ongoing success while addressing the needs of both joint venture partners. Joe will go into more detail later in the presentation. Lastly, we continue to believe that our stock is undervalued and presents an attractive opportunity to return capital to shareholders. As such, we're doubling our share repurchase target from $750 million to $1.5 billion during 2024. In summary, our conviction regarding the strength of our competitive position and the long-term value of our business is as high as ever, and we remain committed to delivering value to our shareholders. Moving to Slide 5, as mentioned, bookings reached nearly $13 billion in the quarter. Advanced safety and user experience bookings totaled $2.5 billion, driven by active safety bookings of $1.9 billion, including our first full system Gen 6 ADAS award, including in-cabin sensing and the full suite of Wind River Embedded and Studio developer software with an emerging EV player, bringing the cumulative active safety and user experience segment awards to $33 billion since the first quarter of 2021. Signal and Power Solutions new business bookings reached a record of over $10.3 billion, reflecting electrical distribution systems bookings totaling a record $7 billion including an award from a leading global Japanese OEM for both plug-in hybrids and battery electric vehicles for the North American market and connection systems bookings totaling $2.5 billion including an award from a leading electric vehicle OEM for high-speed cable assemblies on a global electric vehicle platform, bringing cumulative S and PS segment bookings to $70 billion since the first quarter of 2021. In China, across both segments, we were awarded $3 billion in new business awards with both local and multinational OEMs including a vehicle architecture work from a leading local Chinese OEM for a low-cost battery electric vehicle, putting us on track to exceed our full year 2023 bookings of just under $6 billion. With our industry-leading portfolio, our global scale and our ability to execute highly complex programs, we remain confident in achieving our target of $35 billion of business awards during 2024. Turning to Slide 6 to review our Advanced Safety and User Experience segment's first quarter highlights. The segment reported 5% growth driven by 24% growth in active safety, which is on track for 20% full year revenue growth, more than offsetting the challenging comparables for user experience in Wind River in the quarter. Solid revenue growth was coupled with ongoing productivity improvements, including the continued maturation of our global product organization, driving higher levels of platform usage and software reuse. The consolidation of engineering centers and the continued rotation of engineering resources to our tech center in Bangalore, India, which is driving our percentage located in best cost countries to over 75%. The ongoing adoption of Wind River Studio, which is resulting in a roughly 40% improvement in workflow performance in the software building and scanning processes. And lastly, the continued progress we've made validating local Chinese semiconductor suppliers to meet the increasing demand from local Chinese OEMs for localized sources of supply and provide global OEMs with increased supply chain flexibility and resiliency at significantly lower costs. In terms of commercial highlights in the quarter, in addition to the Gen 6 ADAS award I mentioned earlier, we're awarded a radar program by a global Japanese OEM for applications across multiple vehicle platforms in the North American, European, and Asia Pacific markets. Wind River Studio developer was selected by a major local Chinese OEM to help increase efficiency and reduce costs associated with the development, deployment, operations, and servicing of the intelligent edge systems. Moving to Slide 7. As I mentioned earlier, an emerging electric vehicle OEM has selected the Aptiv Gen 6 ADAS platform to enable turnkey ADAS across a wide range of platforms and models with the start of production in 2026. This is our first full system productized Gen 6 ADAS platform award, building on Aptiv's proven hands-free highway full system solutions, which are already in production. This open modular and scalable ADAS platform will enable advanced hands-free urban and highway vehicle automation, driver safety, and region-specific features, including fully integrated sensors, tightly coupled with Aptiv's edge-to-cloud compute framework. A containerized feature stack enabled by Aptiv's AI/ML enhanced solutions, including radar machine learning and ML-based vehicle behavior. Wind River's extensive offerings such as Wind River Edge with VxWorks and Wind River Studio develop, deploy, and operate the software over the life of the program. This award is a testament to our ability to deliver a full system, productized solution to our customers while validating the value of our Gen 6 ADAS platform, which includes flexibility across key layers of the stack to meet our customers' needs, scalability of hardware and software components from entry-level compliance up to Level 3, and industry-leading performance at a very competitive cost. Turning to Signal and Power Solutions. First quarter highlights on Slide 8. We continue to benefit from our industry-leading portfolio, global scale and experience designing and developing optimized vehicle architecture solutions across the entire range of powertrain platforms from the internal combustion engine to battery electric vehicles. First quarter revenues increased 1%, driven by strong growth in China, partly offset by a decline in high voltage revenues, the result of the softening production schedule for electric vehicle platforms in both North America and Europe that I mentioned earlier. New business bookings during the quarter totaled over $10 billion. We continue to gain traction with top OEMs in China. During the quarter, electrical architecture bookings with Chinese local OEMs reached more than $1 billion, including major awards across each of the five top local OEMs. We received our first high-voltage integrated Power Electronics award for DC-to-DC converters from a global EV manufacturer for its next-gen vehicle platform. As discussed previously, our Signal and Power Solutions segment continues to be impacted by increased labor inflation. To mitigate the impact, the operating team has initiated several actions including the further consolidation of our manufacturing footprint, while rotating more of our footprint to Central America and North Africa and modifying vehicle architecture design to enable the increased automation of select manufacturing processes with a target to increase automation to 30% of standard labor hours by 2026 and over 50% by 2030. Moving to Slide 9, our OEM partners adapt to the shifting pace of consumer electric vehicle demand and emission requirements. Aptiv is positioned to deliver high-performance, cost-effective solutions that span the powertrain spectrum and adapt our capacity to align with the needs of our customers. Starting on the left of the slide. As we've discussed previously, we're benefiting from significant and increasing addressable content per vehicle from approximately 800 in electrical architecture content for an internal combustion engine platform to approximately 2,300 for a full battery electric vehicle. In many cases, this incremental content represents an opportunity to apply existing capabilities to a much larger addressable market. Although global penetration rates for hybrids and battery electric vehicles may fluctuate in the near term, we firmly believe that the long-term macro tailwind remains attractive as the industry continues down the path to full electrification. That said, we've taken a more conservative approach to the pace of electrification. And while we will continue to be more conservative than the broader market sentiment, our outlook still represents a significant market opportunity with meaningful future upside. Finally, on the right side of the slide, the strength of our current portfolio across regions, powertrains, and platforms significantly insulates the business from any single industry headwind. To illustrate this point, if we were to assume that growth of all electrified vehicle platforms on which we have content was reduced to zero in 2024, including low-voltage solutions on battery electric vehicles, with no substitution from ICE vehicle platforms, our overall growth rate would decline by 1 to 2 points. As a result, we believe that we're uniquely positioned to deliver innovative solutions to our customers and value to our shareholders across all powertrain platforms. Moving to Slide 10. Before I turn the call over to Joe to walk through the financials, I wanted to touch on two recent customer events. In late February, the Wind River and Aptiv teams exhibited at Mobile World Congress in Barcelona, giving us the opportunity to collaborate with a wide range of telco customers and partners. The team showcased our ability to support operations at scale for 5G V-RAN and O-RAN deployments while highlighting solutions being leveraged by our customers to improve performance and reliability, reduce costs, and unlock new business models. Among the many years of interest to our telco customers was our unique ability to support the convergence of telco infrastructure with a software-defined vehicle, enabling the deployment and update of new services much faster and much more efficiently. Last week, we took the opportunity to further strengthen our strategic partnerships in China during the 2024 Beijing Auto Show. Led by our local China management team, we engaged with a wide range of customers to discuss key technology trends, consumer expectations, and performance and cost requirements that are unique to the China market. Local OEMs are demanding full system solutions, spanning both hardware and software, while consumer interest is accelerating for higher levels of ADAS and enhanced user experience. Aptiv is perfectly positioned in this market to deliver solutions with increased flexibility, higher performance, and faster speed to market, all at a much lower cost. While we have active engagements with customers across all regions and end markets, it's important to note that all are essentially asking for the same thing: The right hardware, the right software, and the right engineering tool chain to support software-defined functionality for mission-critical applications. As a result, our unique edge-to-cloud portfolio positions Aptiv to capitalize not only on the automotive industry's transition to software-defined vehicles, but also on the digital transformation and convergence of multiple industries as intelligence increasingly moves to the edge. By leveraging these proven solutions across industries, Aptiv is positioned for sustained long-term profitable growth.

Thanks, Kevin, and good morning everyone. Starting with the first quarter on Slide 11. Aptiv delivered strong financial results in the quarter, reflecting robust execution across both segments and continued progress on our cost savings and margin improvement actions, resulting in operating margin improvement of 200 basis points over the prior year. Revenues were $4.9 billion, up 2% or 3% above underlying global vehicle production, which was down 1% in the quarter. Growth was negatively impacted by the continued slowing of battery electrical platforms in the quarter, particularly in North America and Europe, where we saw our high-voltage revenue down 2% and 6%, respectively. Revenues on ICE platforms and high-voltage solutions on hybrids were up 2% and 26%, respectively. As I will discuss shortly, given the continued weakness in electric vehicle production, including significant customer schedule reductions over the past few weeks, we are revising downward our 2024 outlook for the year. Adjusted EBITDA and operating income were $720 million and $544 million, respectively. Operating income margin expanded 200 basis points versus the prior year, in part driven by cost reduction and recovery programs put in place in 2023, as well as continued achievement of our operating performance initiatives, including the continued rotation of our engineering footprint to best cost locations. The year-over-year FX and commodity impacts were negligible. Earnings per share in the quarter were $1.16 and increased 27% from the prior year, including year-over-year earnings growth of 24%, partially offset by higher tax expenses. Share repurchases completed in 2023 and in the first quarter of 2024 added approximately $0.03 to EPS in the quarter. Operating cash flow was strong, totaling $244 million. Capital expenditures were $265 million, and share repurchases totaled $600 million. Looking at first quarter revenues on Slide 12. As noted, revenue of $4.9 billion was up 2%. Revenue growth was driven by strong active safety growth as well as growth in commercial vehicle and engineered components, partially offset by lower high-voltage revenue. Net price and commodities were positive to the top line, partially offset by foreign exchange. Moving to the right, revenues outgrew vehicle production in all regions. North American revenues were up 2% or 1% above market, driven by increases in active safety and engineered components, partially offset by lower high voltage. In Europe, revenues were down 1% year-over-year or 2 points above vehicle production with lower EV production in the region, partially offset by double-digit growth in active safety. In China, revenues grew 5 points over the market, driven by growth with several key local OEMs. Moving to the ASUX segment on the next slide. Revenue growth was 5% or 6% above global vehicle production. Active safety was up 24% in the quarter, benefiting from new program launches as well as continued strong demand across all regions. User experience was down 8% in the quarter, primarily driven by the roll-off of the legacy program in North America and lower multinational JV volumes in China as discussed during our year-end earnings call. Wind River revenue decreased 16% in the quarter due to a strong year-over-year comparison. As we have discussed, Wind River revenues are lumpy on a quarterly basis. For the full year, we expect mid-teens revenue growth at Wind River. Segment adjusted operating income in the quarter was $155 million, up significantly over the prior year driven by cost reductions taken in the second half of 2023 as well as ongoing performance initiatives, including continued rotation of our footprint. Operating income margin in the quarter was 10.8%. Turning to Signal and Power, revenue in the first quarter was about $3.5 billion, representing a 1% increase or 2% above vehicle production, driven by a 3% growth in engineered components. Declines in high-voltage revenue from battery electric vehicles were partially balanced by growth in hybrids, which account for around 25% of our high-voltage product line revenues. Revenue from China increased by 11% as we experienced approximately 30% growth in SPS with local OEMs, while foreign OEMs saw a 2% increase. Segment adjusted operating income was $389 million, or 11.2%, up 40 basis points from the previous year, as our cost savings and operational performance initiatives effectively minimized the impact of higher labor costs. Net pricing and commodity performance were positive, and the year-over-year impact of foreign exchange on operating income was minimal. Moving to our updated macro outlook, we've observed both traditional and global electric vehicle OEMs reduce production schedules mainly in North America and Europe. These reductions are partially counteracted by some increases in internal combustion engine platforms, particularly in North America. Consequently, we anticipate a 1% decline in global vehicle production for the year from a prior forecast of flat. Our outlook for revenue growth is now 5% for the year versus our prior outlook of 7%, reflecting growth over the market of 6%. As for our key FX and commodity rates for the remainder of the year, we are now assuming copper at $4.35, the Mexican peso at MXN 17 to the dollar, and the Chinese RMB at 7.15. Slide 16 has our updated full year outlook. As discussed, our Q1 operating results were substantially in line with our expectations, including the benefit of our cost savings and performance actions. However, as we look at the balance of the year, we do see several likely and persistent headwinds that have caused us to revise and derisk our full year outlook. The revised outlook includes revenues of $21.15 billion, down from the prior midpoint of $21.6 billion, running adjusted revenue growth of 5%. The lower revenues resulted from the previously mentioned customer schedule reductions as well as an additional reduction to our H2 revenue growth based on current market conditions. As a result, first half revenue growth has been lowered to 2% from our prior outlook of 4% and second half growth is now 8%, down from over 9%. Operating income of $2.5 billion or 11.8% of revenues, down $50 million from the prior midpoint. We are increasing our EPS estimate to $6.05 a share at the midpoint as the negative impact of the reduction in earnings is more than offset by the benefit of our share repurchase activity as well as the benefit of previously mentioned Motional transactions, which I'll cover in more detail in a moment. We have increased our outlook for operating cash flow, primarily reflecting improved working capital. We are now targeting share repurchases of $1.5 billion in 2024, up from our prior guidance of $750 million. Moving to the next slide, we lay out the more significant changes to our outlook. With respect to revenue, global vehicle production decreasing from a previous outlook of flat to now down 1%, reduction of our full year high-voltage revenue growth from 20% to 5%, the decrease in high-voltage is partially offset by increases in ICE production schedules, primarily in North America, as well as increases in net price and commodities, reflecting higher copper prices that offset the foreign exchange impact on revenues. The decrease in operating income is driven by the flow-through of lower revenues as well as the negative impact of foreign exchange, primarily the peso and RMB. As it relates to the Mexican peso, although many forecasts expect the peso to weaken over the course of the year, the peso has remained stronger than our initial expectations. Accordingly, we have updated our guidance to reflect an exchange rate of MXN 17 to the dollar. This is more in line with our spot level and also represents the level at which we have hedged approximately 90% of our 2024 peso exposure. Finally, despite the macro headwinds, we fully expect the benefits of the cost savings and performance actions we delivered in the first quarter to continue, partially mitigating the volume and foreign exchange impact. Turning to the next slide. We thought it would be helpful to walk our expected first half versus second half revenues in 2024. Second half revenue is expected to increase approximately $800 million. The increases in both segments are driven by new program launches with key customers in all regions. ASUX half-over-half revenue is expected to increase approximately $200 million with over half of the increase coming from the launch of one of our largest active safety programs across additional platforms in North America and Europe for a global OEM. These additional platforms are internal combustion vehicles and represent several of the OEM's best-selling platforms. Approximately 40% of the launch volume is with local Chinese OEMs, including several launches that have already commenced. The increase in Signal and Power of $500 million includes a launch totaling over $100 million in a large North American internal combustion SUV platform, an additional $100 million across two OEMs for new internal combustion truck launches in North America, and Chinese market launches and volume growth for both local and foreign OEMs of over $100 million. The increase in sales will deliver margins higher in the second half with volume flow-through of approximately 30%, partially offset by incremental FX headwind of approximately $35 million due primarily to the peso. Moving to the next slide. As Kevin noted, we are excited to announce that we have reached a definitive agreement with Hyundai that provides for the future success of Motional while meeting the needs of the joint venture partners. As part of the agreement, Hyundai will provide Motional additional funding of $475 million. Hyundai will acquire 11% of Motional's common equity held by Aptiv for $448 million, and Aptiv will convert approximately 21% of our common equity interest to a preferred stockholding. Hyundai's funding to Motional will occur in the second quarter and we expect the acquisition of Aptiv shares, which is subject to customary regulatory review to close by the third quarter. The preferred stock conversion will coincide with the sale of our common equity to Hyundai. Our updated guidance includes approximately $0.30 of additional EPS, reflecting the benefit of the lower Motional common equity holdings beginning in the fourth quarter of this year. On a full-year pro forma basis, the lower dilution for Motional will result in incremental EPS of approximately $0.90 per share beginning in 2025. Before handing the call back to Kevin, I'd like to walk through our updated earnings per share expectations in more detail. Building off a strong performance in the first quarter, the year-over-year EPS growth of 24% is driven by higher earnings of $1.32 as well as the benefit of share repurchases in 2024 and the improvement resulting from the transaction with Hyundai to reduce Aptiv's common equity holdings in Motional, more than offsetting the increase in Aptiv's tax rate, which was included in our original guidance. In summary, despite the lower vehicle production levels and slowdown in high voltage, we are confident that the measures taken to improve first quarter operating income and cash flow are sustainable for the balance of the year. The earnings and cash flow growth, combined with the proceeds from the Motional transaction, provide us the opportunity to continue our long track record of balanced capital deployment, including the return of capital to our shareholders. When combined with the 2023 share repurchases, our outlook for 2024 results in almost $2 billion of capital returned to shareholders in the past two years, increasing total capital returned to over $9 billion since our IPO.

Thanks, Joe. I'll wrap up on Slide 21 before opening the line for questions. Overall, our strategy remains unchanged while the industry navigates the near-term headwinds. We'll continue to provide flexible, high-performance, cost-effective solutions to our customers that enable the transition to the electrified software-defined vehicle. We remain focused on thought execution and operational excellence, which enables us to delight our customers while optimizing our cost structure to expand margins and deliver value to our shareholders. We executed well in the first quarter and are laser-focused on continuing to execute, which will position us well for the remainder of the year. Operator, let's now open the line for questions.

Just wanted to ask first on the customer side and then second on automation. Just first on the customer side, Kevin, the wins with the Japanese OEMs and the radar and to the high voltage on the hybrid side sound like a real positive. I was just curious if you can comment about where you stand with the Japanese because as I understand, they're very small in the book of business right now, but are they growing? And then also just on the Chinese OEMs, you mentioned that they were looking for locally sourced semiconductors, which I guess makes kind of sense. But it just kind of, I think, makes people nervous that they might be looking for more locally supplied everything. And I'm just curious how they view you, Aptiv, as a supplier as being sort of a local or maybe a U.S. kind of a supplier to Japanese and Chinese potentials?

John, I guess we had your second half of the question. The first half, you broke up a little bit with respect to, I think, it was a mix of electrification bookings or revenues. No. On the first part of the question is the potential with the Japanese, right? I mean it sounds like you're making more headway there than you have in the past on the radar and then the high voltage just on the hybrid side. So it sounds like there's a real opportunity there that's beginning to grow. Listen, let me start with the second part of the question or the second question, and I'll come back to the first. As it relates to the Chinese OEMs, especially the Chinese local OEMs, the reality is they are looking for local sources. And it's one of their objectives to localize the supply chain. As you know, we've had this conversation. We've been in China for close to 30 years and have operated in China to serve the China market. So I think it's best as possible that you view us as a local supplier given the fact that we have fully localized capability for that particular market. Our customers have come to us asking us to make sure that we focus on developing the, call it, Tier 2, Tier 3 supply chain to provide them with solutions. As you can imagine, given some of the geopolitics, they are especially focused on the semiconductor space. So that is an area just again, given the strength of our supply chain and our historical presence in the market we had some capabilities over the last two years especially post the semiconductor crisis in 2021 and 2022. We doubled down on enhancing our capabilities in that particular market. I think I've mentioned previously, we're partnering with over a dozen semiconductor manufacturers in China to deliver their solutions to the automotive market in China. And that's from SoC down to the peripheral sort of semiconductor chips, so that's an area of focus. Alternatively, we have a number of non-Chinese OEMs who are very focused on cost reduction and material savings. We're presenting these opportunities to several of them who are interested in the options and we'll report out when we actually have commercial OEMs to announce. As it relates to the recent awards in Japan, particularly on the ADAS side as well as the plug-in hybrid and BEV side, we have been increasingly focused on Japanese OEMs and the Japanese market over the last couple of years. I believe this reflects the progress we've made and the momentum we've built with several key players like Honda and Nissan. Now, we are beginning to see advancements with the largest Japanese OEM.

And just one quick follow-up on the automation comment. I mean you said 30% by 2026, 50% by 2030. I mean what's the baseline that we're starting from now? And what would that mean as far as labor as a percent of total sales? I'm just trying to understand if this is a cost savings program, cost mitigation program or just what you're going to have to do going forward?

It addresses the issues related to labor availability, labor costs, and the complexity of vehicle architecture by transitioning to a more software-defined, smart vehicle design. These improvements lead to a 30% reduction in labor hours on average wire harnesses, which translates into significant cost savings.

And baseline on automation right now that we should think about?

Baseline right now, we're running at roughly 15%.

I have two questions. First, regarding the Gen 6 award, can you share what the CPV is for that award and how the rest of the pipeline looks? Could this award lead to more wins? Second, it appears you're maintaining the long-term 6- to 8-point GOM framework. Can you explain this a bit more? Is there a tendency towards the lower end of that range, or could GOM potentially accelerate next year?

I'll answer the first question, and Joe can address the second. Regarding the Gen 6 ADS award, I can't provide specific details due to pricing sensitivity and competitive considerations. We've mentioned before that L2+ and L3 content per vehicle is relevant here. This program, alongside our ADAS platform, includes our in-cabin sensing solution and the complete suite of Wind River embedded and studio solutions. You should consider this being within the traditional range we've discussed, especially given our AI/ML advancements with our radar solution and our overall approach to sensor fusion. Our Gen6 ADAS platform can offer our customers savings of 15% to 30%, depending on how the platform is configured, making it a very competitive option.

It's Joe discussing growth over market. Based on our current outlook for 2024, I believe we're closer to the 6% of that range. It's still early to make predictions for 2025, especially considering the trends we've observed in customer schedules recently. However, I believe we're within the 6% to 8% range, and I certainly wouldn't estimate anything higher than that at this time.

Joe, maybe to start, just AS and UX margins in the quarter, really strong, I think a large surprise versus Street expectations. Anything going on there specifically in the quarter we should think about? And how should we think about the margins in that business over the balance of the year?

Yes, Joe, I would say nothing stands out in the quarter as a one-off event, certainly nothing significant. We've been working diligently on improving those margins for quite some time, both on the supplier side and by reducing costs within the business. We implemented some cost measures last year. This engineering rotation has been ongoing. I believe you’re referring to maintaining a margin in the high 10% range, approximately 10.5% to 11% for the full year. It may be a bit inconsistent, as Q3 tends to be lower for us at times, but I think we should see this business finish the year around the mid-10% margin.

Okay. And Kevin, I just want to go back to the China conversation and a couple of things here because, obviously, there's a lot of volatility. There's a lot of new players. You see emerging players like Xiaomi and Huawei. So maybe you could sort of give us a sense of how you think your positioning is with some of even the new emerging players? And we all saw the news about VW and Xpeng on the electrical architecture. What does that mean for your prospects going forward in China back to John's question about one competitiveness, I guess, of vehicles in China, but also a desire for Chinese supply chain.

Yes, as you know, we have been in the China market for a long time, and the dynamics have shifted from being dominated by multinational joint ventures to a more robust presence of local Chinese original equipment manufacturers. Over the past three to four years, we've discussed how our bookings have significantly transitioned from multinationals to local entities. In the last couple of years, the dollar value of our bookings has aligned closely with this shift in mix between local Chinese companies and multinational JVs. Although we are still slightly behind from a revenue perspective, over 50% of our business now comes from local Chinese OEMs. A substantial part of our bookings from last year and this year has been with these Chinese companies. We believe we will continue to bridge this revenue gap over the next 12 to 24 months. Many leading local Chinese OEMs are focused on exporting to Europe and possibly North America, as well as manufacturing in these regions. We are actively collaborating with most of these companies that are seeking supply solutions tailored to the requirements of European and U.S. markets, which differ from those in China. Therefore, we feel well-positioned for growth in China and as these companies consider exporting or relocating production outside of China.

Okay. Maybe just one quick follow-up. I know you mentioned that the mix of business within China is sort of moving, and it sounds like it's now over 50-50. But what about like if we just think about your overall bookings, like what percent of that is domestic China? Do you have a sense?

Yes. In China, we're currently at around 70% local bookings compared to multinational joint ventures. Last year, we were significantly above 60%. It has definitely been trending in that direction, and I expect this to continue over the next year or two.

Two questions, one pretty simple. Just Joe, you mentioned new margin for AS at 10.5%. Does that sort of imply we think SPS is probably on the lower end of something more like 12% to 13%. That's probably where you have more of the pace of exposure.

Yes, one second. Chris. Let me make sure I give you the right number. SPS 11.2% in Q1, yes, I would say you're in the, call it, 12% to 12.5% for coming out of the year.

And then the same, the growth over market split, ASUX probably high single digit and SPS because of the high voltage now at 5%. Is that closer to 3% or 3% to 4%? What's the split on growth over market?

I'd say low to mid-single digits on SPS, yes.

Yes, Chris, I think at current levels, it's fair to assume we continue to buy back stock at fairly healthy levels. The reality is we view our stock as undervalued. Obviously, we'd like to see stock price appreciation and important part of what we're trying to do is to build out our capabilities in and around the software stack as we've talked about, and quite frankly, diversify our revenues further in the industrial markets as well. So we would like to assume that there's a fair amount of acquisition activity that happens during 2024, 2025, and beyond.

Maybe just thinking about where the underlying growth rate is for the business today. So you're pointing to 6 points of growth over market for this year. I know there are a lot of puts and takes, but I think in the bridge that you had provided last quarter, it implied about maybe 2 points of tailwinds from price recoveries, for example, that were tied to semiconductor inflation last year. But there are also mix headwinds in China, where it sounds like you're mitigating with new launches. So just trying to get a sense of where the underlying rate of growth is today as you see it.

Yes, sure. I'm not sure I get the pricing comment or the recovery comment. But listen, I think our long-term view, the framework is 6% to 8% in a flat market, right? So that growth over market is generally consistent with the adjusted growth rate. Obviously, we move a bit with vehicle production. We're obviously working through the high voltage headwind at the moment. We've seen those schedules come down. But as I talked about in my prepared remarks, we're seeing good hybrid growth. We're seeing the internal combustion volumes come back up.

Okay. I guess then from thinking about the incremental performance savings that you're expecting this year, are those tied to the automation initiatives you're talking about? Or is that more of the footprint actions like in SPS?

Automation will take time to develop as Kevin mentioned. At the end of last year, particularly in the second half, we began to focus on some changes in the business. This should not surprise anyone. We have reviewed our cost structure and reduced salaried overhead. We have consistently managed our costs over the past decade, and what you are witnessing now are the benefits of that effort, along with the plans we discussed during Investor Day. While I recognize that high-voltage revenues have decreased, many other initiatives we mentioned are progressing well. We discussed an engineering rotation and reducing engineering as a percentage of sales, and we have ongoing performance initiatives projected to yield several hundred million dollars annually between 2023, 2024, and 2025. We are successfully ticking off those items, which is contributing to the improvement in our margins.

Okay. And then maybe just a quick last one is just on FX. You didn't see much of an impact in the quarter, but it looks like the headwind's going to be for the rest of the year. I mean last year, when we saw the peso strengthening, it was kind of the opposite effect where it was largely impacting you in Q1. So maybe just trying to think about how much of that FX impact is peso versus RMB? Just trying to get a sense of that.

The peso is the more significant factor. It's important to differentiate between the actual year-over-year figures and the guidance. Unfortunately, the peso in Q1 remains quite consistent with its position last year, hovering between 16 and low 17s. This consistency is why there's not a significant impact when comparing year-over-year actuals. We had initially guided for an MXN 18.25 rate, and as I mentioned in my prepared remarks, we expect the peso to strengthen over time, although that hasn't occurred yet. Our approach, when faced with persistent macroeconomic headwinds, is to incorporate them into our guidance and offset them by adjusting costs, which we have effectively done. Additionally, we have the advantage of a hedge that protects 90% of our peso exposure below MXN 17, which is why we have been aligning with the MXN 17 rate.

You took your view for high-voltage revenue for '24 to 5% from 20%. Beyond this year, does have to think a 20% CAGR in high-voltage revenue still achievable? And does the composition between BEVs and PHEVs change at all as you think about the longer-term high voltage outlook?

Yes, I'll start with our customers and knowledge with our customers. Our customers are still pushing forward with the introduction of battery electric vehicles. So you can hear from their public statements that they're still standing behind them and certainly pushing in that direction. In addition to that, they're talking about launching incremental plug-in hybrid or hybrid programs as well to augment their overall product portfolio. So likely near-term. Our general view is you'll see a richer mix of plug-in hybrids relative to what we've had historically. On a go-forward basis, from an overall growth rate of electrification, we'll see. Obviously, it's been a couple of challenging quarters as it relates to our high-voltage revenue growth. As Joe and I have mentioned, over back end of the quarter and in April, we saw a significant reduction in schedules. They seem to have stabilized. But as we get closer maybe the middle of the year, we'll be able to give more visibility as to what we think that growth rate looks like. But I think it's fair to assume you're going to see more plug-in hybrid mix relative to battery electric vehicle mix.

Second question I had was on margins. You had your best 1Q EBIT margin, I think, since 2018. Can you talk a little bit more on what led to the margin strength in the first quarter? And specifically, how much of the footprint actions may have contributed? And typically, 1Q is the seasonal low point for the year, but can you talk about how 1Q may compare to the normal seasonality with EBIT margin?

Sure, I'll begin. If you look back to 2018, we faced significant disruptions from COVID in 2020 and 2021, followed by semiconductor challenges. These three years were quite turbulent for our operations and margins. However, we now see that the macro environment has mostly stabilized in terms of product availability, which has allowed us and our customers, as well as our suppliers, to operate more efficiently. This improvement gives us a better ability to plan ahead. As Joe mentioned in his remarks, we are continuously working on cost reduction, but we also dedicated a year to keeping our customers connected. Since 2023, once things have stabilized, we have been intensely focused on dramatically reducing our cost structure through operational initiatives within our plants and engineering efforts, in addition to lowering our overall overhead. I noted that we reduced our salary payroll by over 10% last year through restructuring and efficiency improvements, and we will continue that trend. Generally, we expect margin growth from the first half to the second half of the year, as production typically increases in the latter half. While there's less clarity now based on recent developments, we anticipate ongoing operational enhancements, including improvements throughout our entire cost structure. This encompasses all aspects of our operations.

Wondering if you could just address a couple of points on active safety. Any voiceover on the solid results in the quarter, I think it was up 25% or so? And then is the expectation to still see 20% plus growth in ADAS for the year? Are you still seeing launches content growth intact?

Yes. As Joe mentioned, we are introducing both new programs and expanding existing ones across a wider range of models with OEMs. There is a growing consumer demand for active safety solutions, which our customers are clearly seeking. We believe this will continue to drive significant revenue growth.

Dan, it's Joe. We are projecting growth of over 20% for the year. As we revert to the traditional way our business has been managed, the performance may not appear perfectly consistent each quarter. However, we are entering a phase with significant launch activities, as I noted in my prepared remarks for the latter half of the year. Launches may peak and then taper off a bit, but the business remains robust, and we anticipate that trend will continue. As Kevin mentioned, we recorded nearly $2 billion in bookings this quarter for active safety, indicating strong momentum in that area.

Great. And then as a follow-up, wondering if you could provide some comments on the price versus inflation dynamics. Inflation, and you talked to some incremental inflation coming into the cost structure this year. Is that coming in as planned? And then how much pricing did you get in 1Q? And what's the pricing outlook for the year? Are we back to sort of typical 1.5%, 2% price down? Is there any offset that you're getting in your commercial discussion?

Yes, Dan, I would say the focus has shifted from direct material inflation to labor inflation. We are currently discussing these issues with customers, particularly regarding labor inflation. Some of this relates to recovery, while as Kevin mentioned, it involves relocating from places like Mexico that are becoming too costly, as well as reducing labor through automation. We have experienced a significant reduction in the direct material costs that previously needed to be passed on to customers, and the conversation has now transitioned to labor inflation. We have several strategies to address this, and as mentioned, we have begun taking cost actions to manage the situation, which will become evident over time. Looking long-term, we have indicated that the net price was around 1.7% before material inflation, which we expect to sustain. This will be part of our outlook. However, labor inflation is something we will navigate at the customer level, especially if they prefer not to relocate facilities or adjust sourcing from other countries, which may lead to price increases. In some cases, we will also have to move plants.

So Kevin and Joe, nobody knows electrical vehicle architecture and active safety, combined, better than you. I mean nobody. So I'd be curious, in your opinion, from a user experience and from a capability perspective, do you see an advantage of Level 2+ systems fitted to a software-defined electric vehicle versus the capability and experience of the same system attached to an internal combustion non-software-defined vehicle system?

That's an interesting question. I'm not sure if the consumer experience would be better with an electric vehicle built on a BEV architecture compared to one based on an internal combustion engine. However, we believe that the BEV architecture would be more optimized, leading to savings in both the architecture and the ADAS system. It would enable a more refined vehicle structure, both in hardware and software, providing greater flexibility for upgrades and enhancements, which translates to being more cost-effective. As we consider the future, we cannot predict all aspects perfectly, but we are confident about the strong trend towards electrification, smart vehicle architecture, and software-defined vehicles. Ultimately, it all hinges on performance and cost.

I appreciate that, Kevin. As a follow-up, people in the robotics community describe two years ago as the good old days, noting a revolution in recent years with large language models and generative AI now integrated into multimodal models and visual learning systems. This integration helps autonomous systems and robotics to learn more effectively without relying heavily on rules-based approaches, which can enhance the AI process. I apologize if this sounds overly generalized, but I believe you understand my point. I'm curious to know if you agree that there have been significant changes in the role of AI in robots, particularly in automotive applications, and how this may be influencing your decision-making and capital allocation.

Yes, that's a great and complex question. I agree that AI and machine learning are evolving and have transformed many aspects of our operations. For instance, they’ve changed how we develop products like radar solutions and other perception technologies. It’s clear that using tools like AI and machine learning enables us to advance more quickly and at a lower cost, which is something we are currently experiencing. This is particularly beneficial with our Gen 6 ADAS platform, where AI and machine learning help reduce the costs associated with the perception system and allow us to lower the computational requirements. However, one aspect that is somewhat unique to the automotive industry and may be debatable is the relationship between safety, traceability, and the complexities introduced by AI and machine learning, especially regarding their lack of traceability which complicates matters. When we engage with our customers, they want to understand how integrated systems function and the reasons behind their failures. This aspect may evolve over time, but for now, there needs to be a balance between traditional rules-based systems and fully AI-driven approaches.

I'll try to be real quick. On SPS, three powertrains, you talked about ICE, hybrid, plug-in hybrid. Europe seems to be growing more, a lot of hybrid growth. China is more plug-in hybrid, let's say, maybe the U.S. is more ICE. Just curious, as these kind of dynamics change, how does that impact your guys S and PS business? Is it easy to pivot? Is there kind of retooling involved to try to change these different powertrains? Or is it just really just straightforward?

It's a different product line. So it's pure BEV product. So whether it's a bus bar or it's a connector for a battery electric vehicle or a harness, it tends to have a specific set of equipment with specific tools. A lot of those are within existing facilities that we had to produce products for both low voltage as well as high-voltage solutions. So there's some ability to pivot there. When you think plug-in hybrid and hybrid, there's some overlap between that product portfolio that goes on a BEV vehicle that would also go on a plug-in hybrid or hybrid vehicle. So there's some work that needs to be done, but it depends on the specific situation, and oftentimes, it's not real significant to shift from one to the other.

Yes, it's not something outsized, Tom, that you'd see like pop up in CapEx or something. I think it could be managed within the existing business and financial framework.

Yes, the other thing that's come up, there's some pretty big legacy OEMs who reported results this past week, commenting on their efforts to reduce their dealer inventory levels. We saw some big just general production cuts in the quarter. I mean they're all saying they're going to do big H2s. But I'm just curious if you're seeing or hearing any just overall high-level downside to overall global production, which would impact all powertrains?

Yes, we have reduced our outlook for vehicle production slightly. The main reason for this is related to battery electric vehicles. While we have noted some original equipment manufacturers increasing their production schedules for internal combustion engine products, overall, battery electric vehicle production has decreased. Yes. As I mentioned in my prepared comments, April saw a reduction in schedules with a few exceptions. There are some ICE platforms that emerged, but overall, we observed a decline in schedules for both legacy global OEMs and global EV-only OEMs over the past 4 to 5 weeks, which is really impacting our top line.

Thank you, everyone, for taking the time today to listen to our earnings call. I apologize for the technical problem at the start. Take care and have a good day.